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'Asia must prepare for dollar collapse'

East Asian economies need to prepare for a possible collapse of the US dollar, the Asian Development Bank says.

28 Mar 2006 08:45 GMT

ADB: Possibility of a dollar collapse small but fallout huge

The warning comes as the US trade deficit reaches a record high and global interest rates continue to rise.

Masahiro Kawai, the ADB's head of regional economic integration, said on Tuesday: "Any shock hitting the US economy or the global market may change investors' perceptions given the existing global current account imbalance.

"Our suggestion to Asian countries is: Don't take this continuous financing of the US current account deficit as given. If something happens then East Asian economies have to be prepared."

He said because of the highly interdependent nature of East Asian economies, if countries worked together to allow their currencies to collectively appreciate against a tumbling dollar then the cost of adjustment would be spread.

"The possibility of a US dollar collapse or sharp decline may be small at this point but it would generate very significant turmoil so East Asian economies ... ought to be ready for that."

The Manila-based ADB is working on several indices of Asian currencies that could be helpful to monitor exchange rate movements in the case of a sharp dollar decline, although its main intention is to help develop regional bond markets.

Political sensitivities

However, the ADB is still trying to decide which currencies to include in this Asian Currency Unit (ACU) amid political sensitivities about the inclusion of the Taiwan dollar given China's claim over the island.

The ADB had apparently been aiming to launch the ACU - a weighted basket of Asian currencies - before the bank's annual meeting in May, but Kawai said this would not be possible.

He said there was no specific launch date yet but hopefully it would be unveiled "in the next few months".

But Kawai played down suggestions that the ACU could foreshadow a single Asian currency like the European Currency Unit (ECU), which existed for two decades before the creation of the euro in 1999.

He said: "The ECU had an official status but the ACU has no such official status. We are not in the position to decide whether this should become a real currency or not."